The Role of a Wine Distributor (Video)

In this video, wine industry sales expert, Ben Salisbury, walks viewers through all aspects of a wine distributor's role in the US Market. The role of the wine distributor has evolved over the years and winery owners, wine brands, and importers would be wise to educate themselves on the "modern" way of working with distributors. This video will break everything down for you and provide a very up-to-date overview of the role wine distributors play. Of course, the information contained in the video is equally valuable to craft distilleries as well. One of the new developments in the "3-tier" world of wine distribution is the advent of DIGITAL 3-TIER vis a vis LibDib (Liberation Distribution).

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Video Transcript:

The 3-Tier System in the Wine Industry

Hi there, Ben Salisbury here. Today, we're going to talk about the role of a wine distributor.

Now, we can't really talk about the role of a wine distributor until we talk about the three-tier system here in the US. It's really a four-tier system if you count the consumer, but here are the three tiers.

At the top of the tier is the manufacturer or the winery, the producer, if you will.

And the middle tier is the distributor.

Then, you have the retailers and restaurants in the third tier.

Now, the fourth tier would be consumers, of course.

But this three-tier system was put in place at the repeal of prohibition. And what makes it so complicated in the US is every state has their own laws about how the three-tier system should work. It literally makes the US like 50 different markets. Many people outside the US see the US wine market as one big market and it is. It's the biggest in the world. But it's very, very complex because the laws vary by state.

Now, a lot of wineries sell their wine off their website direct to consumers. This is a fairly recent phenomenon. It's legal in most US states. And many wineries rely on their foot traffic, in their winery tasting room, selling wine club memberships, just selling wine right there in the tasting room. These are big sales centers for wineries. But as a winery grows and it wants to produce more wine and sell more wine, inevitably they want to get out into the world of retailers and restaurants. And for that, you need a distributor. Now, until five years ago, there was only one type of wine distributor, and that was a traditional brick-and-mortar distributor with a big warehouse, lots of trucks, lots of salespeople.

Digital 3-Tier with LibDib Empowers Small Wineries and Producers

But in the last five years, we've seen the advent of digital three tier, and that is headed up by LibDib. If you don't know about LibDib, you got to check them out because this is the greatest thing since sliced bread for small wineries and small importers, because you don't have to spend time pursuing a distributor, meeting with a distributor trying to get them to carry. You can go on LibDib's platform today and start selling to restaurants and retailers. So doing it digitally is a great way to start if you're just entering into the three-tier world. I'll put a link in the description below, so you can go straight to LibDib's website, and introduce yourself. Tell them I sent you. Here's an article on 3 tips to selling wine on LibDib.

How Wine Distributors Make Money

Now, here's how distributors make money, and it's surprising how few people really understand this fully. It is expensive to run a distribution system. Just imagine the millions and millions of dollars they have tied up in inventory in a giant warehouse that needs to be temperature controlled. And then, they have a giant payroll of delivery people, salespeople, merchandisers, marketing people. It is not inexpensive to have a wine distributor. And so they're going to take a markup. They're going to add a profit margin of roughly 30%. It varies widely but 30% profit margin to the distributor is a good number to use. As you're planning out what you want to look at on the shelf, what price you want your products to be on the shelf, you got to factor in the distributor's profit margin, but that's how they make money and it's well-earned.

The Roles of Wine Distributors

Legal Transport and Wine Compliance Experts

Now that we've talked about the three-tier system and how distributors make money, let's talk about the specific roles that they play in this process. The first role is obvious. They provide the legal transport of goods from the winery or the place of origin to the local market. They have large warehouses and fleets of trucks. Because the laws vary by state, each distributor is going to be a real pro at making sure that the winery is doing everything in a legally compliant way. So that is the first role of a distributor is the legal transport of wine from its place of origin such as a winery into the local market where it's stored in their warehouse.

Custodians of Quality and Wine Inventory in Warehouses

Now, a second role of the distributor is to store the wine until it's ready to be delivered to a local retailer or restaurant. This is one of the biggest costs that a distributor has. First of all, they got to keep the temperature controlled and the humidity controlled so that the product stays in good shape until it's delivered. They have paid for this wine, so they now own it, and they're tying up all that money and inventory. So they like to be very careful not to carry too much inventory. Generally, if you're a domestic winery, you're looking at about a 30-day supply on the floor. So based on how much you're selling each day, you need to be able to have a 30-day supply on the floor.

A lot of wineries don't really understand this, and they don't understand why the distributor just can't keep more wine in their warehouse. Well, they have sophisticated computer systems where they pay very close attention to how much product they need from each brand and each SKU. But the storing of wine in a proper temperature, in a controlled environment, that is one of the big roles of a distributor. And it's easy to overlook it because it just seems like, well, that's what they should do. But it's not easy because wine is heavy, bulky, and very, very expensive.

Wine Distributors Ensure Efficient and Reliable Delivery to Retailers and Restaurants

Another important role distributors play is delivering the product from their warehouse to the restaurants and retailers in the market. Now, this is very expensive and a logistical nightmare, but they're pros at this. They know how to route the trucks and have efficiencies in their delivery system that keep costs down. But no matter how you slice it, it is a very expensive thing to do, and this is why distributors get so much in the margin. It's expensive having a fleet of trucks and delivery drivers and all the things that go along with that like insurance, et cetera. So the safe and legally compliant delivery of goods. And many of these trucks are temperature controlled, especially in the states where it's warmer or in the warmer months. So this is a very important role that distributors play. If you're a winery of secured distribution in a restaurant for something by the glass, you can be assured that the distributor's going to get that wine delivered at the appropriate time and in the appropriate condition.

Market Insights and Business Intelligence

Another role that distributors play, and this gets overlooked and underappreciated too often by wineries, is to be an expert in the local market. Most of these distributors have been doing this in their market since the repeal of prohibition in the '30s. They know everything about the market, the best accounts, the places that would be great for this type of wine or this type of spirit. They are experts. And this is an important role they play, and suppliers, wineries, distilleries, everywhere should take full advantage of this. But it doesn't let you off the hook, Mr. Supplier or Mrs. Distiller. It doesn't let you off the hook from becoming an expert in the market yourself, or at least making a really strong effort to learn everything you can about the markets that you're in. You shouldn't just leave it all completely up to the distributor. So yes, they are experts in that local market, and you should pick their brain and learn from them, take their advice, but you should also become knowledgeable about the market you're in on your own. That's just really smart.

Another role distributors play, and this kind of goes along with being a market expert, is they have keen business insights to the trends in the local market, what's selling, what's not, what is the hot price point, where should I be priced relative to competitors. They are a treasure trove of business insights. They have so much data. Especially the large distributors, they've really put a lot of money and investment into using that data, mining that data to come up with insights, even to the point of predicting what is going to be hot in the years to come. So this is an important role distributors play, and it's a valuable role.

Enhancing Retailer Success Through Wine Distributor Qualities

Category and Assortment Management

I'm going to put these last roles into one category called other services, if you will, but that does not mean to trivialize them in any way. One of the roles that a distributor plays is category manager. They really understand what's working and what's not, and retailers and restaurants rely on distributors to help them understand what should my assortment be, how many wines should I carry, which wine should I carry, which varietals, what price tiers, what packaging. There's just so much that has to go along with category management and distributors or expert at this. This is one of the services they provide.

Strategic Shelf and Space Management

Going along with that is shelf management, space management. Most distributors have sophisticated software that can assist retailers in how to optimize the placement of items on the shelf so that when consumers come in to shop, they're optimizing the retail value, the sales off those shelves. So space management is an important role distributors play. Most distributors also have some kind of a marketing department that will help with point of sale and help with menu printing and understanding how to lay out a wine by the glass card or cocktail menu. All kinds of marketing services distributors can provide, and they do.

Digital Logistics and Ordering 

And then lastly, in the age of digital transactions, most distributors are able to accept orders from retailers or restaurants digitally. And this is no small thing. It requires a lot of software development, a lot of logistics. And the pandemic really pushed this to the forefront, and it's important part of the role distributors play. It used to be that distributors just physically couldn't get to every account in their state, just not logistically possible. But with digital transactions, it's easy to reach everyone, every licensee in the state and find out what their needs are and give them the mechanism to place an order. So these are just some of the other services that a distributor provides.

Distributor Sales Volume and Managing Expectations

Now, if you're paying close attention, there's one role that I did not mention, and I saved it for last because we need to talk about it. And this role is selling stuff for you. Yes, distributors have a large sales team, and they do their best to cover all of the supplier's needs. But think about it, distributors, large, medium, and small, are completely overwhelmed with products to sell. The ratio of salespeople to the number of products in a portfolio, it's very, very unworkable in most cases. So if I was a supplier, a winery, I would tamp down my expectations of what the distributor's going to do for me in terms of building sales and distribution. They're just not able to do what they used to do because there's so many brands. They're overwhelmed, and you must recognize that.

As a wine producer, as a winery, as a supplier, you must recognize what they're up against and you need to adjust yourself so that you can compensate for that. Typically, what that means is you are going to have to do a lot more work in the market. You are going to have to study the market and identify the key accounts. You are going to have to develop key buyer relationships. You're going to have to invest money and feet on the street to go out and personally sell. That's the modern way of working with your distributor. You want to earn a distributor's respect, let them see your footprints all over the market and you doing your part.

Do not expect that if you secure a distributor in a new state... Let's say you want to go into a new state and you find a great distributor and they agree to take you on, do not expect that they're going to run out and build all this new distribution for you. Those days are gone and it's just not realistic. And here's the thing, they're not always going to come out and tell you that. They expect you to figure that out. So consider this a public service announcement. I'm telling you, just because you have a distributor does not mean they're going to automatically go out and sell for you. No matter how much you educate them, work with them, incentivize them, you still have to do the lion's share of the work yourself.

Getting Your Distributor to Match Your Efforts in the Market

So the role of a modern distributor is less about selling and building distribution than it is all the other things I've already talked about. Now, here's one silver lining. Distributors tend to take care of the suppliers who take care of themselves. So when they see your efforts in the market, it's not unreasonable to ask them to match your efforts. Show them what you're doing in the market. Keep them abreast of everything you do. Distributors do not like surprises from their suppliers. So if you are pulling your weights and you are keeping them and communicating with them about what you're doing, you're going to get a lot more support and help from them. So there you have it, that's the role of a distributor. In each state in the US, winery owners, wine brand owners, importers, you all would be very wise to modernize and upgrade the way you think about distributors, the role they play, the value they add, and how best to work with wine distributors..

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